Commodities 2024: China's soybean demand set to fall amid impending hog supply cuts

China's soybean demand in the marketing year 2023-24, running October to September, is forecast to slide year on year amid expected hog supply cuts in the first quarter of 2024, market sources told S&P Global Commodity Insights, likely pressuring the oilseed price.

While the US Department of Agriculture has projected China's MY 2023-24 soybean imports at 102 million mt, up 2 million mt from November's estimate, and up 1.15 million mt on the year, some private China-based consultancies have a bearish outlook. For instance, Shanghai-based agricultural consultancy JCI China forecast MY 2023-24 imports at 96.2 million mt, down 3.6% on the year.

Adding to the bearish tone, the latest report from China Agricultural Supply and Demand Estimates has forecast soybean imports for MY 2023-24 at 98.7 million mt.

Mirroring the sentiments, local traders see a nearly 2 million mt slide in China's Q1 2024 soybean imports.

"China's typical soybean demand coverage for Q1 shipment is around 26-27 million mt, but we are probably looking at a lower volume of around 24-25 million mt," a China-based broker said.

According to the analysts, the primary factor for this gloomy import expectation is the impending production cuts in the hog population in China, which has struggled with oversupply since early 2023.

China has imposed three waves of stockpiling over 2023 to stimulate a gradual spot price recovery as breeding enterprises grapple with negative profits(opens in a new tab) throughout 2023, with demand expected to recover with the festive lunar new year.

"Hog breeding margin has been poor throughout 2023," another China-based broker said. "We could see large-scale restructuring in major domestic hog breeding companies early next year amid abating pork demand as the country slips into economic slowdown," he said.

China has the world's largest annual crush capacity at nearly 160 million mt. However, the weekly operational rates in 2023 have been extremely low, in the range of 50%-60%, amid unfavorable crush margins and tepid domestic demand from the animal feed sector.

However, larger-than-expected volumes of soybean arrivals between November-January 2024 would potentially see higher utilization rates, with the sudden upsurge likely to strain storage logistics and finding end-users for both soybean meal and oil.

"Basis for future delivery for soybean meal is too high in my opinion with a premium of Yuan 500/mt ($70.11/mt) alongside May Dalian Commodities Exchange futures, I think that is too high with the current market fundamentals," a hog farmer said.

The Asian nation typically imports 98 million-100 million mt of soybeans in a year and over 80% of those beans are processed into soybean meal-based animal feed, especially catering to the local hog breeding industry -- the world's biggest. So, when the demand for pork -- China's staple food -- abates, leading to a drop in pork prices, the hog population slides accordingly in the latter months to offset falling hog margins, leading to a subsequent decline in soybean demand from the animal feed sector.

Hedging-led bullish outlook

Notwithstanding poor crush margins, depleting hog numbers and stagnating economy, analysts at S&P Global Commodity Insights have gone against the tide of bearish outlooks and projected China's soybeans imports to rise year on year in MY 2023-24 as the country is seen hedging against Brazil's delayed planting(opens in a new tab) and production cuts.

China is forecast to import 101 million mt of soybeans in MY 2023-24, up 0.15% on the year, S&P Global data showed, whereas the crush is predicted at 95.5 million mt, which is 0.5% higher on the year.

"We believe that China's record soybean imports forecast for MY 2023-24 will be driven by stock building in the country to cover for supply uncertainties from Brazil," said Jack Larimer, senior research analyst at S&P Global.

Although the crush is seen rising year on year, S&P Global analysts have added caution to their projections on the back of multiple bearish factors.

"We see a downside risk to our crush forecast for China due to poor hog margins, a stagnating animal herd, and a slow growth environment in the country," Larimer said. "We expect these issues to possibly limit crush growth and ultimately curtail China's demand for the oilseed," he added.

Hog oversupply weighing on soybean demand

China's hog breeding sector -- the prime driver of soybean demand -- has been struggling with losses since early 2023 amid oversupply issues. So, the hog inventory is likely to be the first causality of limiting losses in early 2024 and sizable cuts in hog production are expected in the coming months, which is not an ideal situation for soybean demand.

According to JCI data, China's pig farming is Yuan 94/head ($13.21/head) in the red on average during the first 11 months of 2023, the poorest margin in the last 10 years. So, sow culling tends to accelerate to cut supplies.

Sustained hog oversupply has been pressuring pork prices, which has been a double whammy for local breeders.

China's pork price declined by 39% on the year to Yuan 25/kg in early November, and losses averaged Yuan 143/head for pig farming which increased by 115% year on year, according to the Ministry of Agriculture and Rural Affairs data.

But it's not all doom and gloom for the country's hog breeding sector as a revival is expected as early as the second half of 2024.

With China's soybean demand heavily dependent on the health of its hog industry, the impending resurgence in the swine sector is likely to boost the country's oilseed imports next year.